Slide 1Slide 2CHAPTER OUTLINESlide 4Slide 5Slide 6Slide 7Slide 8Slide 9Slide 10Slide 11Slide 12Slide 13Slide 14Slide 15Slide 16Slide 17Slide 18Slide 19Slide 20Slide 21Slide 22Slide 23Slide 24Slide 25Slide 26Slide 27Slide 28Slide 29Slide 30Slide 31Slide 32Slide 33Slide 34Slide 35Slide 36Slide 37Slide 38Slide 39Slide 40Slide 41Slide 42Slide 43Slide 44Slide 45Slide 465-15-2Merchandising Operations and the Multiple-Step Income StatementKimmel ● Weygandt ● KiesoFinancial Accounting, Eighth Edition55-3CHAPTER OUTLINEDescribe merchandising operations and inventory systems.1LEARNING OBJECTIVESRecord purchases under a perpetual inventory system.2Record sales under a perpetual inventory system.3Prepare a multiple-step income statement and a comprehensive income statement.4Determine cost of goods sold under a periodic inventory system.5Compute and analyze gross profit rate and profit margin.65-4Merchandising CompaniesBuy and Sell Goods Wholesaler ConsumerThe primary source of revenues is referred to as sales revenue or sales.RetailerLEARNING OBJECTIVEDescribe merchandising operations and inventory systems.1LO 15-5Income MeasurementCost of goods sold is the total cost of merchandise sold during the period.Not used in a Service business.Net Income (Loss)LessLessEqualsEqualsSalesRevenueCost of Goods SoldGross ProfitOperating ExpensesILLUSTRATION 5-1 Income measurement process for a merchandising companyMerchandising CompanyLO 15-6OPERATING CYCLESILLUSTRATION 5-2Operating cycles for a service company and a merchandising companyLO 15-7Companies use either a perpetual inventory system or a periodic inventory system to account for inventory.FLOW OF COSTSILLUSTRATION 5-3Flow of costsLO 15-8Perpetual SystemMaintain detailed records of the cost of each inventory purchase and sale.Records continuously show inventory that should be on hand for every item.Company determines cost of goods sold each time a sale occurs.FLOW OF COSTSLO 15-9Do not keep detailed records of the goods on hand.Cost of goods sold determined by count at the end of the accounting period.Calculation of Cost of Goods Sold:Beginning inventory $ 100,000Add: Purchases, net 800,000Goods available for sale 900,000Less: Ending inventory 125,000Cost of goods sold $ 775,000Periodic SystemFLOW OF COSTSLO 15-10Traditionally used for merchandise with high unit values.Shows the quantity and cost of the inventory that should be on hand at any time.Provides better control over inventories than a periodic system.Advantages of the Perpetual SystemFLOW OF COSTSLO 15-11ILLUSTRATION 5-5Sales invoice used as Purchase invoice by Sauk StereoMade using cash or credit (on account).Normally record when goods are received from the seller.Purchase invoice should support each credit purchase.LEARNING OBJECTIVERecord purchases under a perpetual inventory system.2LO 25-12Illustration: Sauk Stereo (the buyer) uses as a purchase invoice the sales invoice prepared by PW Audio Supply, Inc. (the seller). Prepare the journal entry for Sauk Stereo for the invoice from PW Audio Supply.Inventory 3,800May 4Accounts Payable 3,800Record Purchase of MerchandiseILLUSTRATION 5-5LO 25-13Ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller.Ownership of the goods remains with the seller until the goods reach the buyer.Freight costs incurred by the seller are an operating expense.LO 2FREIGHT COSTSILLUSTRATION 5-6Shipping terms5-14Illustration: Assume upon delivery of the goods on May 6, Sauk Stereo pays Public Freight Company $150 for freight charges, the entry on Sauk Stereo’s books is:Inventory 150May 6Cash 150Assume the freight terms on the invoice in Illustration 5-5 had required PW Audio Supply to pay the freight charges, the entry by PW Audio Supply would be:Freight-out 150May 4Cash 150FREIGHT COSTSLO 25-15Purchaser may be dissatisfied because goods are damaged or defective, of inferior quality, or do not meet specifications.Return goods for credit if the sale was made on credit, or for a cash refund if the purchase was for cash.May choose to keep the merchandise if the seller will grant a reduction of the purchase price.Purchase ReturnPurchase AllowancePURCHASE RETURNS AND ALLOWANCESLO 25-16Illustration: Assume Sauk Stereo returned goods costing $300 to PW Audio Supply on May 8.Accounts Payable 300May 8Inventory 300PURCHASE RETURNS AND ALLOWANCESLO 25-17Credit terms may permit buyer to claim a cash discount for prompt payment.Advantages:Purchaser saves money.Seller shortens the operating cycle by converting the accounts receivable into cash earlier.Example: Credit terms may read 2/10, n/30.PURCHASE DISCOUNTSLO 25-182% discount if paid within 10 days, otherwise net amount due within 30 days.1% discount if paid within first 10 days of next month.2/10, n/30 1/10 EOMNet amount due within the first 10 days of the next month.n/10 EOMPURCHASE DISCOUNTSLO 25-19Accounts Payable 3,500May 14Cash 3,430Inventory 70(Discount = $3,500 x 2% = $70)Illustration: Assume Sauk Stereo pays the balance due of $3,500 (gross invoice price of $3,800 less purchase returns and allowances of $300) on May 14, the last day of the discount period. Prepare the journal entry Sauk Stereo makes on May 14 to record the payment.PURCHASE DISCOUNTSLO 25-20Accounts Payable 3,500June 3Cash 3,500Illustration: If Sauk Stereo failed to take the discount, and instead made full payment of $3,500 on June 3, the journal entry would be:PURCHASE DISCOUNTSLO 25-21Should discounts be taken when offered?Example: 2% for 20 days = Annual rate of 36.5%($3,500 x 36.5% x 20) ÷ 365 = $70PURCHASE DISCOUNTSLO 25-22$3,800 8th - Return$300Balance4th - Purchase$3,58070 14th - Discount1506th – Freight-inPURCHASING TRANSACTIONSLO 25-23Sales may be made on credit or for cash.Sales revenue, like service revenue, is recorded when the performance obligation is satisfied.Performance obligation is satisfied when the goods are transferred from the seller to the buyer.Sales invoice should support each credit sale.ILLUSTRATION 5-5LEARNING OBJECTIVERecord sales under a perpetual inventory system.3LO 35-24Journal Entries to Record a SaleAccounts Receivable or Cash XXXSales Revenue XXX#1Cost of Goods Sold XXXInventory XXX#2Selling PriceCostRecording SalesLO 35-25Accounts Receivable 3,800May 4Sales Revenue 3,800Illustration: PW Audio Supply records the sale of $3,800 on May 4 to Sauk Stereo on account (Illustration 5-5) as